Entitlement? I Paid for It

Entitlement? I Paid for It

October 12, 2016

Last Tuesday the Social Security Administration announced that the COLA (cost of living adjustment) for this year will be .3%. That equates to an average monthly increase of $5.00. This signals the determination that the cost of living for retired Americans has only increased three tenths of one percent during the last year.

By my calculation that seems light, but it’s better than the adjustments of the last two years, which were 0.0%. Over the last 35 years I’ve had lots of conversations with clients about Social Security and Medicare. And the calculations for paying into them, as well as their taxable consequences have changed significantly.

Most of those conversations with younger clients are objections to paying in; and most of those conversations with older clients are about maximizing benefits on the claiming end. And like most things financial those conversations ended up in a lesson about the programs and how they work.

When I first got into the business there was dire concern that Social Security would “run out of money” and be bankrupt. That was 35 years ago. Those worries continue. Every five or six years someone makes a run at “privatizing” Social Security. One side of the political aisle talks about “cutting benefits” while the other talks about “increasing taxes” to fund it.

So far, Social Security is alive and well; yes, benefits have been modified, and yes, taxes have increased, but the program continues and I’d have to believe that it will. For a long, long time. Like that or not, here’s what you need to know:

Social Security and Medicare are two completely separate systems and benefits. You can be claiming one and not the other. But you qualify for them the exact same way. For both you need to achieve 40 “quarters” of paying-in – 10 years of hitting a certain income level (X4) to be “fully covered”. For 2017, that quarterly “FICA & Medicare taxed” income level is $1,300. That means if you earn $5,200 in 2017 you get all four “quarters” – it doesn’t matter if you earned all that income in one week, or throughout the year.

The important part is that this is “earned income” – meaning either it was paid to you via W2 employment or self-employment. These are the only forms of income that are taxed for FICA & Medicare. So rental income, investment income, alimony, withdrawals from retirement accounts don’t earn Social Security/Medicare quarters. (Sure, you pay income taxes on that money, but not “payroll” taxes.)

Once you become “fully insured” (with 40 quarters of coverage) you qualify for Medicare at the age of 65, working or not – regardless of when you were born. Medicare premiums will be deducted from your SS benefits depending on your total taxable income – adjusted annually based on your filed income tax returns – and those premiums are due whether you are claiming SS benefits (or not). This could result in your writing a check to maintain Medicare coverage.

That said, the average Medicare premium charged is less than $100/month and the cost for similar insurance would be closer to a $1,000/month, so it’s still an excellent deal.

Once you become “fully insured” you qualify for Social Security income payments depending on when you were born. Check out this link (https://www.ssa.gov/) to see when YOU qualify for full retirement age. The longer you wait past that date the larger your monthly SS income payment will be until you reach maximum benefit.

If you claim SS income payments “early” – meaning before your “full retirement age” – for 2016 you can only earn $15,720 before some of your benefits will need to be repaid. So don’t claim “early benefits” if you are continuing to earn above that threshold.

If you are married, or were ever married, to someone claiming SS income benefits, you may be eligible to receive a benefit for yourself based on their earnings. You get your, or half of theirs – whichever is greater.

SS benefits can be up to 85% income taxable to you if your total income exceeds certain levels. Ex. You receive $10,00 in SS income benefits and your total income (including SS income) is greater than $40,000, then $8,500 of your SS income is taxable.

There is a fair amount to understand about SS and Medicare before claiming benefits, and there are fantastic information websites provided by the agencies to help you sort this out. And your tax professional can help you better understand the ways to maximize your benefits. It’s called an entitlement by politicians, but you paid for it – so make your money matter!